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Learn More About: Bank Interest Rates

Updated on June 11, 2015

Do you know exactly how much interest you will pay on your loan? Are you aware of the interest you will earn on your fixed deposits and recurring deposits? If not, learn now! It is always good to be aware of how much interest you will pay on your debts and how much you will earn on your deposits. Eventually, you will find, this will help you plan your finances better for proper asset allocation.

So, what is ‘interest rate’?

Interest rate refers to the amount charged by a lender for lending a particular amount of money to a borrower. It is a percentage on the principal amount loaned/borrowed, normally expressed for a period of one year. On credit cards, it is called the annual percentage rate (APR).

How are interest rates calculated?

There are different ways to calculate interest on different financial products. For loans, interest rates are based on loan tenures, base rates and bank rates considering the borrower’s creditworthiness. For fixed deposits accounts, interest rates are based on the tenure and amount deposited. For savings bank accounts, interest rate is calculated inspective of any time frame. As per the recent announcement made by the RBI, banks have the freedom to fix interest rates for savings account holders. Now, they will be able to get maximum benefits on their savings irrespective of the time period.

How may did you know?

Before I start telling, let's see how many types of interest rates you know in advance.

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Interest rates for Loans

Banks offer different kinds of interest rates for different loans. Interest is charged by banks in return for the money they provide to borrowers. This is a kind of compensation for lending, as the lender could have invested the funds somewhere else instead of lending them out.

You can take a loan either at simple or compound interest rates. Simple interest is always based on the original principal, and calculated by multiplying the interest rate with the principal and the number of periods. Compound interest is calculated on the principal amount and also on the accrued interest of previous periods of a loan. The compound interest rate gets higher with the number of compounding periods.

Banks also offer floating and fixed rates of interest for loans. Floating interest is subject to changes based on market conditions and bank norms. Normally, floating rates of interest are applicable for housing loans. Fixed rates of interest are static and they stay constant over the whole loan period as per the agreement.

There is another type of rate known as call rate. This is charged on short term loans extended to broker and dealers who use the funds to make margin loans to their clients. Such loans need to be closed on immediate basis after receiving requests from banks.

Interest rates for Fixed Deposits:

By investing in FDs, you can get higher returns on your investments than you would on a normal savings account. Also, you can get interest pay-outs which refers to the process of earning interest on your deposits. Interest is paid out or credited by banks to the investor at a specified time. You can get it on a quarterly or yearly basis based on the information mentioned in the deposit. You can also reinvest your interest earned on FDs. Interest is reinvested with the principal amount and compounded according to the time period stated in the deposit. Banks like Central Bank of India, Punjab National Bank, Union Bank of India, State of Bank of India, Axis Bank etc. offer the reinvestment option for fixed deposits. Reinvestment of FDs will enable you to earn higher returns. For example a yearly interest of 8% might return 8.24% p.a when you opt for reinvestment of your interest.

Inter-bank interest rates:

Inter-bank interest rates are applicable to short term loans made between banks. Many a time, banks borrow and lend money in the interbank market to manage their liquidity requirements. Banks normally borrow money when they run short on liquidity to meet possible withdrawals by clients. On the other hand, when they have excess liquidity, they lend money and earn interest on it. Interest charged on such loans depends on the availability of money in the market and the terms of contract between banks.

Interest for credit cards:

Banks also charge interest on credit cards besides an annual fee. This fee/interest is the price you pay for using the privilege of borrowing money. However, banks don’t charge any interest on credit cards directly. As long as you pay your credit card bill in time, you don’t have to pay any interest. If you miss your credit card bill payment on the due date, you need to pay interest on the outstanding amount.

A fair idea of the products that banks offer and the interest charged/given on them will add to your financial literacy and help you become a better investor. Also, knowing about the various aspects of interest rates charged on various loans will help you plan your loan repayment and investments more systematically. However, despite this plethora of information available, both online and offline, most of us still don’t use this information to our benefit. Many people still apply for loans without knowing the exact interest rates offered by banks. Most of us simply rely on brokers whom we contact for loans only to end up taking on unnecessary troubles. Instead, keep yourself informed and utilize the benefits offered by banks in the best possible way.

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